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Our Thought Provoking Insights

The cost of food price inflation

Rising food prices is an inevitability. Inflationary pressures have been lurking on the horizon for a while and it was when, rather than if, this would translate into retail price hikes. It is equally clear that these have further to go although predicting when they will peak is virtually impossible. Beyond these headlines there are some interesting underlying questions to consider.

How far should the supermarkets go in protecting their margins?

While the backgrounds are very different, the debt crisis of 2008 was the last time the sector increased prices markedly like this. Again, margin protection was the key motive. However, in achieving this it did open wide the already ajar door for the discounters. There were very material market share gains worth many billions for the likes of Aldi, Lidl, B&M and Home Bargains.

Should they prioritise margin or market share?

Passing supply chain inflation on is, to a degree, inevitable. The strategic question is, how far should they go? The key players have so far not all chosen to increase prices by the same amount. There is a competitive cost to this, around the age-old conundrum of protecting margin or market share.

Prepare for the recovery of the eating out market

Another source of pressure for the food retailers is the recovery of the eating out market. While restaurants are nowhere near back to pre-Covid levels, some of the supermarkets’ gain in spend from closures and restrictions has migrated back to eating out, as it was bound to. Increasing retail prices provides some useful insulation from the revenue hit.

The very significant transfer of market share from majors to discounters seen post-2008 is unlikely to be repeated on that scale. Nevertheless, I believe the traditional UK grocery trade has underrated the discounters, adopting a naïve haughty view that they are somehow superior. Massive business lost has been the consequent price. This totally unjustified view of superiority is still far too prevalent and competitively dangerous. Increasing prices needs to take full account of the potential consequences.



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